Indictment Broadens In Shelters At KPMG

By JONATHAN D. GLATER

Published: October 18, 2005

Federal prosecutors have significantly widened the criminal case against executives involved in the sale of questionable tax shelters by the accounting firm KPMG, filing dozens of criminal charges against a total of 19 defendants.

The new indictment, which was presented in federal district court in Manhattan yesterday, augments and replaces an indictment against nine people filed in August.

The revised indictment accuses 17 former KPMG executives, an outside lawyer and an investment adviser of scheming to defraud the Internal Revenue Service ''by devising, marketing, and implementing fraudulent tax shelters, by preparing and causing to be prepared, and filing and causing to be filed with the I.R.S. false and fraudulent U.S. individual income tax returns containing the fraudulent tax shelter losses, and by fraudulently concealing from the I.R.S. those shelters.''

The additional defendants are expected to be arraigned on Monday. Prosecutors described the case as the largest criminal tax case ever filed.

The new indictment adds 43 counts of tax evasion and two counts of obstruction of the I.R.S. -- not, in every case, against every defendant -- to the single conspiracy count against the nine defendants named in the first indictment.

The shelters sold by KPMG have been under investigation for about two years, by the I.R.S., Congress and prosecutors. Prosecutors charged yesterday that four shelters, known as Blips, Flip, Opis and SOS, created $11 billion in fake losses that allowed wealthy individuals to avoid paying some $2.5 billion in taxes to the government.

Prosecutors described the superseding indictment as following the same theory as the initial one.

''We're looking at the same case that we were looking at before,'' Justin S. Weddle, an assistant United States attorney on the case, told the court. He added that he thought a trial would take about three months; the judge previously scheduled a trial to begin in May 2006.

But the new indictment adds details on slightly different aspects of the case. For example, some of the unnamed co-conspirators in the first indictment appear to have been identified and charged in the new one. Yesterday's indictment also identifies specific cases in which a new defendant made false statements to an I.R.S. agent, and charges that some of the new defendants used the shelters themselves to claim hundreds of thousands of dollars in tax losses.

Both versions of the indictment contend that several of the defendants prepared opinion letters advising that the Flip and Opis shelter transactions were more likely than not to withstand an I.R.S. challenge. ''As they well knew, the tax positions taken were not more likely than not to prevail against an I.R.S. challenge if the true facts regarding those transactions were known to the I.R.S. and opinion letters and other documents used to implement Flip and Opis were false and fraudulent in a number of ways,'' yesterday's indictment states.

The emphasis on the charge that the defendants knowingly drafted false opinion letters and prepared fraudulent documents is important, because proving that charge does not require the prosecutors to try to explain to members of a jury how the complex transactions worked and, then, why they were improper.

Yesterday was the deadline set by the judge hearing the criminal case, Lewis A. Kaplan, for prosecutors to add charges and defendants.

The 10 additional defendants are: Richard Rosenthal, former chief financial officer of KPMG; Larry DeLap, former partner in charge of the firm's professional tax practice; Steven Gremminger, former associate general counsel in the general counsel's office of the firm; Gregg Ritchie, former head of the group that, prosecutors say, devised, marketed and carried out tax shelters for wealthy individuals; Randy Bickham, a former tax partner in the firm's office in San Francisco; Carol Warley, a former tax partner in the firm's Houston office; David Rivkin, a former tax partner in the firm's San Diego office; Carl Hasting, a former tax partner in the firm's office in Woodland Hills, Calif.; David Greenberg, a former tax partner in the firm's Los Angeles office; and David Amir Makov, who joined other former KPMG partners in conducting transactions underlying some of the shelters.

Lawyers for the new defendants received copies of the indictment only late yesterday afternoon. E. Lawrence Barcella Jr., a lawyer in the Washington office of Paul, Hastings, Janofsky & Walker representing Mr. DeLap, said of the charges, ''From what I can see, the Justice Department appears to be doing exactly what they're charging the defendants with doing, and that is taking a misguided, overly aggressive, unprecedented view of a complicated legal area.''

In addition, Mr. Barcella said, no court had determined that the shelters were illegal.

Michael Horowitz, a partner at Cadwalader Wickersham & Taft who is representing Mr. Ritchie, said his client was innocent. ''The government is seriously overreaching in this case and Mr. Ritchie looks forward to being vindicated at trial,'' he said.

The indictment does not name any of the individuals who purchased the shelters from KPMG, some of whom have sued the firm for damages in the wake of the government's scrutiny of the transactions. According to the indictment, KPMG took in about $115 million in fees for selling the shelters.

KPMG itself reached a settlement with the government in August and with that deal managed to avoid an indictment; a criminal charge proved fatal to another accounting firm, Arthur Andersen, which audited Enron. As part of the settlement the accounting firm agreed to pay a $456 million penalty, accept an independent monitor of its operations and acknowledge wrongdoing.

While in court yesterday, lawyers for the group of nine defendants charged in August raised concerns about the number of documents to be made available by the government and the cost of obtaining copies, both in electronic and paper format.

The judge was skeptical of the problem, but gave the defense lawyers a week to explain what they would like the government to provide and why.